Paradox project update

Zephyr Energy PLC

18 October 2023

 

Prior to publication, the information contained within this announcement was deemed by the Company to constitute inside information as stipulated under the UK Market Abuse Regulation. With the publication of this announcement, this information is now considered to be in the public domain.

18 October 2023

Zephyr Energy plc

("Zephyr" or the "Company")

Paradox project update

Update on State 36-2 well;

28-11 well work to commence; and

farm-in to further acreage in the Paradox Basin, Utah

Zephyr Energy plc (AIM: ZPHR) (OTCQB: ZPHRF), the Rocky Mountain oil and gas company focused on responsible resource development from carbon-neutral operations, provides an update on the State 36-2 LNW-CC well (the "State 36-2 well") and the Greentown Federal 28-11 well (the "28-11 well") located on the Company's acreage in the Paradox Basin, Utah, U.S. (the "Paradox project").

The Company is also pleased to announce an agreement to further expand the Paradox project by farming-in to the Salt Wash Field, a previously producing asset with proven oil, gas and helium reserves located directly to the south of Zephyr's White Sands Unit (the "WSU") in Utah.

State 36-2 well update

As previously announced, in April 2023 Zephyr's State 36-2 well experienced a control incident during which hydrocarbons flowed unconstrained for four days due to the failure of a safety valve. The well was brought under control with no injuries and limited environmental impact, and the Company has subsequently undertaken comprehensive well work operations to assess the future viability of the existing wellbore. 

During the incident, multiple joints of the well's 2 7/8-inch production tubing were compromised, and Zephyr's operations team has been working methodically to remove and inspect the remaining joints while keeping the wellbore static. Operations to retrieve the damaged tubing have progressed slower than expected due to the poor condition of the tubing, as exhibited by the multiple damaged and buckled joints retrieved that led to the need for milling operations and resulted in shorter retrievals per trip.  Recent operations have not resulted in sufficient recoveries to justify the continuation of the ongoing cost of the well work versus the estimated cost to redrill the well.

As a result, the Company's board of Directors (the "Board") has reviewed multiple alternatives to target the significant productivity of the reservoir at this location, and has elected to proceed with a redrill of a "twinned" well from an adjacent location on the same drilling pad.

The Company retains full well control insurance coverage and expects to recover substantially all costs associated with the well control incident, including those associated with the redrill.

Zephyr has a pre-existing approved permit for a second well on the pad, a permit which will be amended to target the same natural fracture network at the same location in the Cane Creek reservoir as the State 36-2 well. 

Preparations for the redrill have commenced, focused on maximising efficiencies and leveraging knowledge learned from drilling the State 36-2 well.  Timing of the redrill will be dependent upon securing an appropriate rig contract and other ancillary services, with a current target for redrill in the first quarter of 2024.  Alternatives for nearer term tie-in of production from the State 16-2 and State 28-11 wells are being considered in parallel.

In addition to the redrill, and utilising corporate cash flows expected to be generated from the Company's Williston Basin portfolio, Zephyr plans to drill a second well in the Paradox Basin in the first half of 2024 ("H1 2024").  It is expected that a single rig contract may cover the drilling of both wells, providing further efficiencies and reduced overall costs. At present, the Company plans to drill the second well on the Salt Wash Field, as outlined below.

Greentown Federal 28-11 well update

The 28-11 well forms part of the Paradox Basin asset and infrastructure package acquired by Zephyr in October 2022.  Historically, the well produced over 0.36 billion cubic feet ("BCF") of gas and 93,000 barrels of oil ("BO") prior to being shut-in due to a pipeline shut-down.  Since then, pressure at the wellhead has increased due to the natural recharge of the Cane Creek reservoir. 

Over the last three months, Zephyr's operations team has restarted production of the well to reduce wellhead pressure and to produce oil in volumes suitable for sale.  The well has averaged circa 50 BO per day, with a small amount of associated natural gas being flared.  Due to tight monthly flaring limits, the well is limited to roughly ten days of production per month. 

Now that the wellhead pressures have been reduced, Zephyr plans to utilise the workover rig currently at the State 36-2 well (once operations at that pad have been completed) to commence well work at the 28-11 well.  These operations will include the installation of a new pump.

Figure 1: Federal 28-11 well site	Figure 2: Oil storage tanks at the Federal 28-11 well site

After the new pump is installed, Zephyr plans to continue to produce the well within mandated flaring limits until the Company's natural gas processing infrastructure becomes operational.  The 28-11 well has a pre-existing tie into Zephyr's pipeline infrastructure and will be able to achieve higher uptimes when Zephyr's gas processing facilities have been completed.

Salt Wash Field farm-in

The Board remains fully committed to growing and developing its Paradox project and unlocking its significant potential value for shareholders. As a further step in this process, in line with other recent acreage, working interest and infrastructure acquisitions, the Company is pleased to announce an agreement to farm-in to a minimum 75 per cent working interest in a 1,047-acre leasehold position in the Salt Wash Field which lies three miles to the south of the Company's WSU.

Figure 3: Zephyr acreage in the Paradox Basin including the new Salt Wash Field

The Salt Wash Field was discovered in 1961 and consists of a four-way dipping anticline within the Leadville Formation. The field has a thin (15 feet) oil rim which was the target for most historic development drilling activity and resultant production. Above the oil rim is an inert gas cap (~500' gas column) consisting of nitrogen (72%) with approximately 22% hydrocarbon gases and 1.4% to 1.7% helium content. The field was first produced in 1961 and was subsequently shut-in having only been partially developed, as the oil rim was produced and the market for natural gas and helium was not supportive of further development at the time. 

Salt Wash Field highlights include:

·    Demonstrable oil and gas potential in the Cane Creek reservoir (the same formation which underlies the WSU).

·    Secondary oil and gas potential within the Upper Leadville Formation.

·    Proven helium discovered resource with deep exploration prospective resource opportunities:

o  Net helium discovered resource potential: 0.07 to 0.19 BCF (Company estimate*).

o  Net helium un-risked, prospective resource of a further 0.04 to 0.66 BCF.

o  1.4% to 1.7% helium content.

·    Close proximity to Zephyr's other Paradox acreage and surface infrastructure.

·    Historical production of 1.65 million barrels of oil and 11.7BCF of gas in total (8.26 BCF from the Lower Leadville reservoir) prior to being shut in.

·    Drilling activity planned for the second quarter of 2024 with a dual-purpose Leadville Formation delineation well with deep exploration targets.

The key terms of the farm-in are as follows:

·    Initial payment of US$300,000 due within 30 days of the date of the transaction, to be funded from the Company's existing resources.

·    A second payment of US$300,000 due within 60 days of the transaction, also to be funded from the Company's existing resources.

·    Zephyr to drill, log and case one vertical delineation well (the "Commitment well"), with spudding prior to 30 June 2024, to top basement rock (circa 11,000ft measured depth) to obtain a one hundred per cent share in the leasehold.

·    The incumbent leaseholder (the "seller") will have the option to back-in to the leaseholding at a 25% working interest, with no historic cost exposure, once the delineation well is drilled and a field development plan has been proposed by Zephyr.  From that point forward, the seller would become a fully paying 25% working interest partner.

·    Zephyr has begun the work to integrate the well planning for the Commitment well within its wider Paradox project development. Should the Company not meet its condition to drill the Commitment well during H1 2024, it could lose its rights to the leaseholding.

It is currently forecast that the cost of the Commitment well will be up to circa US$6 million, and the Company has commenced conversations with industry participants (including infrastructure and existing helium-focused companies) to jointly fund the drilling of the Commitment well.  Alternative options include funding the Commitment well from Zephyr cash resources or not proceeding with the project. The Company does not intend to raise funds for the Commitment well by way of an issue of equity.

The farm-in enables Zephyr to increase its footprint across its primary play, the Cane Creek reservoir, in a location close to existing operations. It also grants access to the increasingly active helium play that spans south-east Utah, northern Arizona and western Colorado, which can supply the growing U.S. industrial demand for helium. This industrial helium supply requirement has resulted in recent helium prices rising up to US$1,000/mscf. As such, this farm in fits well with Zephyr's strategy in the area, capitalises on the Company's regional basin knowledge, and opens a series of possible future opportunities in a region becoming more active with drilling and M&A activity.

Colin Harrington, Zephyr's CEO commented: "Our Board has concluded that redrilling the State 36-2 well is the optimal path forward to harness the significant discovery made by the initial well.  We are focused on both the near-term potential of the State 36-2 well location as well as the long-term potential of the Paradox project and the Board remains fully committed to its vision of opening up the next prolific onshore U.S oil and gas play.

"Benefits from a redrill include obtaining a new wellbore and utilising the learnings from the State 36-2 well operations to date, and we expect that our well control insurance coverage will cover substantially all costs associated with the redrill. Furthermore, I am confident that our operations team will be able to deliver an effective twin well and once again access the considerable productivity we observed in the original well bore.

"Next steps include securing a drilling rig.  In the interim, the workover rig currently on site will be moved to the 28-11 well pad, where it will undertake work to generate an additional source of incremental production for the Company.  The 28-11 well is a particularly liquid rich Cane Creek well and at this time of higher oil prices, this work is expected to have a rapid payback and provide a stable revenue stream going forward.

"In conjunction with the redrill and workover operations, our new Paradox farm-in is particularly exciting.  We have long studied the potential to redevelop the remaining reserves of the Salt Wash Field, which lies directly to the south of the WSU, utilises the same road network, and may ultimately sell produced hydrocarbon volumes into our recently acquired pipeline infrastructure.  While helium is a new addition to our resource exposure, many nearby Paradox Basin oil and gas operators are already producing co-mingled helium in commercial quantities, and there is an active local offtake market for produced helium. While Zephyr is not looking for helium to become a primary focus, we do expect to partner with industry participants to help appraise and fund the potential of this resource while also taking advantage of our regional knowledge, existing operations and asset platform.  I should also make clear that funding for the Commitment well will not be provided through a future Zephyr equity raise.

"Overall, I am confident that we are taking the optimal course of action for the long-term value of the Company, and the next few months will be full of activity.  Upcoming efforts will focus on preparations for the next round of drilling operations, the delivery of a gas marketing agreement, construction of infrastructure and the commissioning of a Competent Persons Report for the entirety of the Paradox project.  We also plan to progress partnership conversations with upstream and infrastructure participants.

"Finally, with production from our non-operated portfolio expected to grow significantly in the fourth quarter, we are fully funded for all planned work on the existing portfolio, with room left for further acquisition opportunities and additional drilling in 2024."

Contacts:

Zephyr Energy plc Colin Harrington (CEO) Chris Eadie (CFO)	Tel: [phone]
Allenby Capital Limited - AIM Nominated Adviser Jeremy Porter / Vivek Bhardwaj	Tel: [phone]
Turner Pope Investments - Joint Broker James Pope / Andy Thacker	Tel: [phone]
Panmure Gordon (UK) Limited - Joint Broker John Prior / Hugh Rich / James Sinclair-Ford	Tel: [phone]
Celicourt Communications - Public Relations Mark Antelme / Felicity Winkles / Ali AlQahtani	Tel: [phone]

Qualified Person

Dr Gregor Maxwell, BSc Hons. Geology and Petroleum Geology, PhD, Technical Adviser to the Board of Zephyr Energy plc, who meets the criteria of a qualified person under the AIM Note for Mining and Oil & Gas Companies -June 2009, has reviewed and approved the technical information contained within this announcement.

*Estimates of resources and reserves contained within this announcement have been prepared according to the standards of the Society of Petroleum Engineers. All estimates are internally generated and subject to third party review and verification.

Notes to Editors

Zephyr Energy plc (AIM: ZPHR) (OTCQB: ZPHRF) is a technology-led oil and gas company focused on responsible resource development from carbon-neutral operations in the Rocky Mountain region of the United States. The Company's mission is rooted in two core values: to be responsible stewards of its investors' capital, and to be responsible stewards of the environment in which it works.

Zephyr's flagship asset is an operated lease holding of over 46,000 gross acres located in the Paradox Basin, Utah, 25,000 acres of which has been assessed to hold, net to Zephyr, 2P reserves of 2.6 million barrels of oil equivalent ("mmboe"), 2C resources of 34 mmboe and 2U resources 270 mmboe.

In addition to its operated assets, the Company owns working interests in a broad portfolio of non-operated producing wells across the Williston Basin in North Dakota and Montana. Cash flow from the Williston production will be used to fund the planned Paradox Basin development. In addition, the Board will consider further opportunistic value-accretive acquisitions. 

 

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